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  • Thematic Investing

    What Israel-UAE Normalization Means for Investors

    Steven Schoenfeld, CEO, MV Index Solutions
    Tzlill Keren-Blum, EMEA Representative, MV Index Solutions
    September 09, 2020
     

    The historic announcement in mid-August of normalization of relations between the United Arab Emirates and Israel ignited a surge of excitement in the two countries, bringing years of covert business and security ties between Israel and in the UAE into the open.

    The initial diplomatic breakthrough was followed on August 29 with a formal decree by the president of the United Arab Emirates Khalifa bin Zayed Al Nahyan scrapping a five decades-old economic boycott against Israel. This enables trade and financial agreements between the countries as part of “the UAE’s efforts to expand diplomatic and commercial cooperation with Israel, leading to bilateral relations by stimulating economic growth and promoting technological innovation.”1

    The decree means UAE citizens and businesses will be free to do business withand invest inIsrael, and to forge partnership with Israeli companies regarding opportunities in the UAE and beyond.

    Furthermore, we believe there will be significant impact in bilateral trade, direct investment in infrastructure, cooperation in science, agriculture, water, energy and tourism. Communications and financial transactions are also expected to be easier now that the UAE has opened its phone lines to Israel, stopped blocking access to Israeli websites, and established SWIFT connectivity for direct payments. The accord between the countries will also include direct flights, with approval from Saudi Arabia to use its airspace granted on September 2.

    With comprehensive bilateral trade and investment agreements expected to be signed by the end of September, Israel’s Finance Ministry now sees potential for annual trade with the UAE quickly growing to $2B/year, and surging to $6.5B once cooperation matures.2

    We believe Israeli companies that are constituents of the BlueStar Global Israel Indexwhich the VanEck Vectors Israel ETF (ISRA) seeks to trackare poised to benefit.

    Israel is one of the world leaders in AgriTech, WaterTech and FoodTech, all of which may be easily deployed in the UAE, given its similar environmental challenges. Israel expects to develop joint ventures that can help improve the oil-rich Gulf nation’s food security, such as water desalination and crop cultivation in the desert. There is also potential UAE direct investment in Israeli energy fields in the Mediterranean. This may also result in a “re-rating” of the value of Israel’s energy assets, a process started by Chevron’s acquisition of Noble Energy this past summer.

    We believe the appeal of Israel’s tech ecosystem—commonly referred to as "Start-Up Nation"—to contribute to the diversification of Gulf economies may now be even more irresistible to UAE investors, entrepreneurs and innovators. Early-stage Israeli firms, as well venture capital and private equity funds focused on Israeli tech will surely be major beneficiaries in our view. ISRA includes meaningful exposure to the most dynamic parts of Israel’s innovation ecosystem. This consists of AgriTech, BioTech and Medical Devices, CyberSecurity and DefenseTech, all of which are highly relevant to the UAE’s economy, as well as the energy and infrastructure opportunities. In fact, several leading Israeli cybersecurity and defense companies are known to have quietly conducted business with the UAE and other Gulf Arab countries in the past few years, but now the relationships will become more open and grow strongly.

    In closing, we believe that the normalization of relations with the UAE will possibly benefit almost all aspects of the Israeli economy, even before the “knock on effects” of deeper ties with other Arab states like Oman, Bahrain and especially with Saudi Arabia. And while the initial deals are likely to focus on direct investment in infrastructure and joint ventures in AgriTech and biotech, we believe the biggest potential windfall will be the flow of investment into Israel’s capital markets, a positive shift that may reverberate for years to come.

    Steven Schoenfeld is the CEO of MV Index Solutions, a global index provider with more than $19B in assets as of August 31, 2020 tracking its equity, thematic tech, fixed income and digital asset indexes.

    Tzlill Keren-Blum is MV Index Solutions’ EMEA Representative, based in Tel Aviv.

    DISCLOSURES

    Quote from President Khalifa quoted by UAE’s official WAM news agency.

    Finance Ministry Deputy Chief Economist, cited by Bloomberg News, 30 August 2020.

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